For the three months leading up to February 19, the return on the
most shorted stocks in the US "reached heights not seen since the
third quarter of 2011 — when Standard & Poor's
cut the US's triple-A credit rating — and even exceeded the peak
during the financial crisis in 2008," Ali wrote in a recent note.

Here's what's going on:

A hedge fund decides to bet
against a company, so it borrows the shares and then sells
them. The plan is to buy them back at a lower price.

But the fund gets a little freaked out by market moves and
decides it wants to reduce risk by cutting back on its positions.

To close a short position it has to buy the shares back, and
if lots of funds do that, the share price rises.

Those not bailing out of the short then wind up with a bet
moving against them — and the process repeats itself from step
two onward, creating a vicious rebound in the share price.

Ali's comments set out a bit more detail about exactly what has
been going on and how it compares with previous instances:

Generally, high short-interest stocks perform poorly. That is,
returns on the stocks most commonly shorted by large hedge funds
and institutional investors tend to lag the returns of the
least-shorted stocks. However, during periods of
financial distress, the opposite tends to happen, as investors
race to cover their short positions and de-risk, thus driving up
the prices of those stocks with higher levels of short
interest. The magnitude of these returns reached levels
we haven't seen before during the first six weeks of 2016.

The critical thing to note is that this doesn't last forever. And
when the heavily shorted stocks give up those gains, they can
lose value very fast. Here is Ali again (emphasis ours):

Looking at past episodes of strong outperformance in high short
interest stocks, we have also seen a sharp unwind as
markets stabilize in subsequent quarters. Therefore as
investor risk appetite returns, we can expect returns on shorted
stocks to reverse and normalize over time.